The light is ON when the hard drive is being accessed.
If it's steady, that means somethings reading or writing the heck out of your disk, and not giving it a break. That would definitely explain your slowdown. Antivirus scans and indexing tools can do this.
If you're familiar with the Windows Task Manager, you can go to the Processes tab, and under the View menu add columns such as I/O Read/Write/Other bytes. Also show processes from other users. That might help track down the disk hogging culprit.
Or, if you have < 3GB of RAM installed, check the Performance Tab. If you're using > 80% of the physical memory currently installed, your system may be memory swapping, which certainly would explain the slowdown. XP typically needs 1GB to work without swapping, Vista and 7 need 2GB